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Rexit: ‘Work yet to be completed’, but no RBI 2nd term for Raghuram Rajan

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Published Jun 18, 2016, 5:22 pm IST
Updated Jun 18, 2016, 8:49 pm IST
Rajan was open to doing more, but will bow out and return to academia after ‘consultation with govt’.
Reserve Bank of India Governor Raghuram Rajan
 Reserve Bank of India Governor Raghuram Rajan

Mumbai: Reserve Bank of India Governor Raghuram Rajan will step down when his term ends in September, he wrote in a letter to colleagues published on the central bank's website on Saturday. 

"On due reflection, and after consultation with the government, I want to share with you that I will be returning to academia when my term as Governor ends on September 4, 2016," Rajan wrote.

 

Speculation has been ongoing whether Rajan, an acclaimed IMF economist known to have predicted the 2008 global financial crisis, would get a second term after BJP leader Subramanian Swamy launched a no-holds barred attack on him, recently accusing him of destroying the economy with his hawkish stance on interest rates.

Read: Congress lashes government over Rajan's decision against second term

Swamy had also questioned whether Rajan was "mentally, fully Indian" as he holds a US Green Card, among other allegations.

While Finance Minister Arun Jaitley called for restraint in public criticism in the wake of Swamy's attacks, BJP President Amit Shah said the newly-nominated MP's remarks were his personal opinion.

 

In his letter to colleagues, 53-year-old Rajan, appointed by the previous UPA Government in September 2013, said he "will, of course, always be available to serve my country when needed".

Read: Rajan has given large measure of credibility to RBI: SBI Chief

Rajan also rued that his work was "yet to be completed" on two significant matters -- containing inflation and cleaning up the books of banks -- and he "was open to seeing these developments through".

But, he decided to return to academia after the end of his current term "on due reflection, and after consultation with the government", the on-leave Professor of Finance at Chicago University said, without giving any specific reason.

 

There have been concerns that Rajan's exit, which has been termed as 'Rexit' to give it a play like Brexit and Grexit, could lead to adverse impact on the country's financial markets.

While the Governor did not specifically refer to this, he said in his letter that the RBI would be able to "ride out imminent sources of market volatility like the threat of Brexit."

Here is his message to colleagues as posted on the RBI website:

*********************************************

Dear Colleagues,

I took office in September 2013 as the 23rd Governor of the Reserve Bank of India. At that time, the currency was plunging daily, inflation was high, and growth was weak. India was then deemed one of the “Fragile Five”. In my opening statement as Governor, I laid out an agenda for action that I had discussed with you, including a new monetary framework that focused on bringing inflation down, raising of Foreign Currency Non-Resident (B) deposits to bolster our foreign exchange reserves, transparent licensing of new universal and niche banks by committees of unimpeachable integrity, creating new institutions such as the Bharat Bill Payment System and the Trade Receivables Exchange, expanding payments to all via mobile phones, and developing a large loan data base to better map and resolve the extent of system-wide distress. By implementing these measures, I said we would “build a bridge to the future, over the stormy waves produced by global financial markets”.

 

Today, I feel proud that we at the Reserve Bank have delivered on all these proposals. A new inflation-focused framework is in place that has helped halve inflation and allowed savers to earn positive real interest rates on deposits after a long time. We have also been able to cut interest rates by 150 basis points after raising them initially. This has reduced the nominal interest rate the government has to pay even while lengthening maturities it can issue – the government has been able to issue a 40 year bond for the first time. Finally, the currency stabilized after our actions, and our foreign exchange reserves are at a record high, even after we have fully provided for the outflow of foreign currency deposits we secured in 2013. Today, we are the fastest growing large economy in the world, having long exited the ranks of the Fragile Five.

 

We have done far more than was laid out in that initial statement, including helping the government reform the process of appointing Public Sector Bank management through the creation of the Bank Board Bureau (based on the recommendation of the RBI-appointed Nayak Committee), creating a whole set of new structures to allow banks to recover payments from failing projects, and forcing timely bank recognition of their unacknowledged bad debts and provisioning under the Asset Quality Review (AQR). We have worked on an enabling framework for National Payments Corporation of India to roll out the Universal Payment Interface, which will soon revolutionize mobile to mobile payments in the country. Internally, the RBI has gone through a restructuring and streamlining, designed and driven by our own senior staff. We are strengthening the specialization and skills of our employees so that they are second to none in the world. In everything we have done, we have been guided by the eminent public citizens on our Board such as Padma Vibhushan Dr. Anil Kakodkar, former Chairman of the Atomic Energy Commission and Padma Bhushan and Magsaysay award winner Ela Bhatt of the Self Employed Women’s Association. The integrity and capability of our people, and the transparency of our actions, is unparalleled, and I am proud to be a part of such a fine organization.

 

I am an academic and I have always made it clear that my ultimate home is in the realm of ideas. The approaching end of my three year term, and of my leave at the University of Chicago, was therefore a good time to reflect on how much we had accomplished. While all of what we laid out on that first day is done, two subsequent developments are yet to be completed. Inflation is in the target zone, but the monetary policy committee that will set policy has yet to be formed. Moreover, the bank clean up initiated under the Asset Quality Review, having already brought more credibility to bank balance sheets, is still ongoing. International developments also pose some risks in the short term.

 

While I was open to seeing these developments through, on due reflection, and after consultation with the government, I want to share with you that I will be returning to academia when my term as Governor ends on September 4, 2016.  I will, of course, always be available to serve my country when needed.

Colleagues, we have worked with the government over the last three years to create a platform of macroeconomic and institutional stability. I am sure the work we have done will enable us to ride out imminent sources of market volatility like the threat of Brexit. We have made adequate preparations for the repayment of Foreign Currency Non-Resident (B) deposits and their outflow, managed properly, should largely be a non-event. Morale at the Bank is high because of your accomplishments.  I am sure the reforms the government is undertaking, together with what will be done by you and other regulators, will build on this platform and reflect in greater job growth and prosperity for our people in the years to come. I am confident my successor will take us to new heights with your help. I will still be working with you for the next couple of months, but let me thank all of you in the RBI family in advance for your dedicated work and unflinching support. It has been a fantastic journey together!

 

With gratitude

Yours sincerely

Raghuram G. Rajan

*********************************************

An outspoken Rajan has ruffled many feathers with his candid views on various issues including the tolerance debate and his 'one eyed is king among blinds' remark.

In his message, Rajan reflected on his three years at the helm of the central bank, tracing the journey from taking over the governorship in 2013 under difficult circumstances when the country was in "Fragile Five" with high inflation and intense pressure on the rupee. "At that time, the currency was plunging daily, inflation was high, and growth was weak. India was then deemed one of the 'Fragile Five'," he said and quoted from his opening statement which spoke of opening a special deposit window from the diaspora to tide over the crisis.

 

But the Governor was quick to note that the country is no longer weak, saying "today, we are the fastest growing large economy in the world, having long exited the ranks of the Fragile Five." Rajan also mentioned the other measures he had spoken about, including inflation-targeting, introducing new kind of banks and taking universal ones on-tap and addressing the asset quality stress through a data base. "Today, I feel proud that we at the Reserve Bank have delivered on all these proposals," said Rajan, who had also served as the Chief Economic Advisor under the UPA regime under the then Finance Minister P Chidambaram before taking over as the RBI chief. Besides, he also headed a committee on financial sector reforms.

 

At the end of his three-year tenure, Rajan would become the first RBI Governor since 1992 to have a term of less than five years.

His predecessors -- D Subbarao (2008-13), YV Reddy (2003-08), Bimal Jalan (1997-2003) and C Rangarajan (1992-97) --- all had five-year (three plus two) terms or more.

Rajan, who became the 23rd Governor on September 4, 2013, pointed out that the work on operationalising the monetary policy committee (MPC) which will take the inflation-targeting framework ahead, and the clean-up of bank balance-sheets as unfinished agenda.

 

The academic in him had come to the fore very often to speak on a range of issues from tolerance to ideas to the government's pet flagship programmes to GDP computation through his many public speeches, which rubbed the ruling establishment the wrong way.

Pointing out to the over USD 360 billion forex kitty, Rajan said it is a record high and reiterated confidence of comfortably weathering the NRI deposit repayments due soon without any hitches.

Like for any other RBI Governor, the most contentious point in the relationship with the Finance Ministry was the rate setting strategy and by raising rates, he behaved contrary to the North Block wishes.

 

Rajan, however, tried hard to convince that they wanted to help establish a credibility to RBI's ability to reign-in inflation and once he was confident of the shift in the trajectory, started lowering the rates.

In the letter, Rajan, who was dubbed a rock star by the media and was the darling of foreign economists and analysts, said the RBI has cut the key  rates by 1.50 per cent since taking the accomodatory stance in January 2015.

He also counted helping Government create the Bank Board Bureau, creating a whole set of new structures to allow banks to recover payments from failing projects, and forcing timely bank recognition of their unacknowledged bad debts and provisioning under the Asset Quality Review (AQR) as other achievements.

 

Rajan said the enabling framework for National Payments Corporation of India to roll out the Universal Payment Interface will soon "revolutionize mobile to mobile payments" in the country.

Rajan, who introduced a slew of measures on the liquidity front, also counted the issue of 40-year government bond as an achievement.

The letter did not mention much on change in RBI's functioning but said, "the RBI has gone through a restructuring and streamlining, designed and driven by our own senior staff."

"The integrity and capability of our people, and the transparency of our actions, is unparalleled, and I am proud to be a part of such a fine organization... It has been a fantastic journey together!"

 

Foreign fund managers like Marc Faber and Jim Rogers were public in describing Rajan as one of the best central bankers across the world, while a number of industry leaders back home including N R Narayana Murthy have been pitching for a second term for him.

"One of the advantages that India has other than having the lot of smarter people is that Rajan is probably the best central banker in the world, or at least the least bad central banker in the world," Jim Rogers of Rogers Holdings recently said.

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